MSCI (NYSE:MSCI) has been on a tear for a decade now, delivering staggering returns of 633% at recent prices compared to the S&P 500's total returns of 125% during the same period. While it's not exactly a household name outside the investment community, MSCI is a leading provider of investing products and services and has established a history of strong, consistent growth.
You might be most familiar with MSCI's index-linked products, including the iShares Core MSCI EAFE ETF and iShares Core MSCI Emerging Markets ETF. However, MSCI is also making a big push into ESG (environmental, social, governance) and climate investments, and it recently began reporting these activities as a separate segment on its financial statements. Management has a lot of optimism here, and for good reason. ESG investing represents a growing market trend, and it could be a key driver of growth for a company that's already displayed an impressive growth rate.
MSCI has already seen outstanding growth
MSCI is a leading provider of tools and services for the global investment community. Its products and services include indexes, portfolio construction, and risk management analytics, as well as ESG research and ratings and other climate solutions. The company serves clients across the financial world, including pension funds, hedge funds, banks, and broker-dealers, as well as wealth managers (including robo-advisors). It earns revenue through subscriptions, asset-based fees, and other non-recurring revenues. Subscription revenue is its largest source, with 71% of its revenue in the first quarter coming from clients under contracts or other license agreements. It also earns asset-based fees, which make up 26% of revenue, on assets linked to its indexes.
In the first quarter, MSCI had $478 million in revenue, with 61.1% coming from its index segment, 28% from analytics, and 7.3% from its newly reportable ESG and climate segment.
MSCI has seen outstanding revenue and income growth in the past five years. During this time, the company has increased its revenue by a compound annual growth rate of 9.5% and topped that in operating income and net income, growing at rates of 17% and 21.9%, respectively. Increased profits at a faster rate than sales is a great sign of the scalability of MSCI's business.
"The largest reconstruction of the global economy since the industrial revolution"
There has been strong corporate interest in ESG and climate solutions lately, and MSCI provides solutions such as benchmarking against underlying ESG and climate data as well as licensing ESG ratings for sustainability-linked financings. CEO Henry Fernandez has said that "we believe that addressing the impacts of climate change will require the largest reconstruction of the global economy since the industrial revolution."
MSCI began separating out its ESG and climate results in this year's first-quarter financial statements. This new segment helped it grow net new recurring subscription sales to nearly $34 million, up 46% from last year.
In addition, the company's overall run rate was $1.9 billion in the first quarter, up 18.4% from last year. Run rate is a key metric management uses to measure operating performance of the company; it's an estimated annualized value of the recurring revenues under its client license agreements for the next 12 months. ESG and climate run rate was $147 million, up 42% from last year. While ESG and climate run rate makes up only 7.7% of MSCI's total run rate, it has been one of the fastest-growing parts of MSCI's business, growing at a compound annual rate of 30% since 2010.
Not only that, but last year, MSCI was ranked as the No. 1 ESG index provider by equity ETF assets linked to its ESG indexes, and the No. 1 climate index provider by equity assets linked to its climate indexes, according to Refinitiv.
MSCI's work on its ESG ratings and indexes is so good that BlackRock, another big player in the ESG space, has its six largest ESG ETFs in total net assets based on or linked to MSCI-developed indexes. MSCI has listened to its clients' needs for modern investments -- building its ESG and climate products, which is a great sign that the company will continue to be a leader for years to come.
Expectations for MSCI going forward
MSCI says that its goal is to "build better portfolios for a better world." In the latest earnings call, CFO Andrew Wiechmann pointed out that "ETFs linked to MSCI, ESG and climate equity indexes experienced cash inflows of nearly $25 billion during the quarter, representing 70% market share of all global ESG and climate equity ETF flows."
MSCI has already seen rapid growth thanks to its popular index products and analytics-based products. However, that hasn't stopped it from innovating with its ESG and climate segment -- which is young and growing at a faster clip than its other products. MSCI has outperformed the market for a decade, and with its current strategic moves, there's no reason it can't continue to do so for the next decade.